How to measure and manage Scope 3 emissions: PwC

The task may seem daunting, but confronting this challenge head-on can bring business advantages

Companies that are on a path to decarbonization face a significant obstacle in addressing Scope 3 emissions. In earlier reports, we gave you an overview of Scope 3, discussed the evolving climate disclosure requirements for these emissions and made a case for why your company should build an ESG data reporting strategy. But we know that many companies still struggle with measuring and managing these emissions.

That process will likely require your company to both allocate internal resources and to work closely with external suppliers and business partners across your value chain. It should also command the attention of the C-suite. Leaders such as the CFO, CSO and CIO will need a plan to collect the data, make determinations about which Scope 3 emissions should be included in their company’s inventory, pick a methodology for calculating these emissions, and then take action to manage and eventually reduce them.

Why measuring Scope 3 emissions is important

Many companies have begun measuring and managing Scope 1 (direct) and Scope 2 (indirect) emissions. But Scope 3 emissions are a more difficult task. Why measure Scope 3 emissions? There are several reasons your company should consider this challenge now.

Your customers want business to play a role in reducing greenhouse gas emissions.
Suppliers and business partners are likely on a similar path to reducing their own carbon footprint and they’re looking to work together on sustainable sourcing and identifying cost savings and inefficiencies across their value chain.
Investors increasingly expect companies to disclose this information (and that it be confirmed).
Companies need to comply with evolving climate disclosure regulations such as the SEC’s new climate disclosure rules, Europe’s Corporate Sustainability Reporting Directive (CSRD), and California’s climate reporting requirements.

A plan to measure, manage and reduce emissions could also help your company build brand health, attract new customers, build confidence with your investors and potentially win business with key vendors, suppliers and other business partners that are on a similar journey.

How to get started on your emissions strategy now

One of the first steps your company should take is to become familiar with the Greenhouse Gas (GHG) Protocol, which has established global standard frameworks that provide guidance on measuring and managing emissions across the value chain and help companies identify areas for potential emissions reductions.

Early on, your company may also need to make a Scope 3 emissions materiality assessment. There are 15 categories of Scope 3 emissions, including upstream emissions generated by suppliers and business partners that source, produce and transport the materials your company uses to produce products and services as well as downstream emissions from the logistics, use and disposal of your products. Upstream emissions also cover emissions from business travel and employee commuting while downstream emissions include investments and leased assets.

While your company should collect data for each of those 15 categories, many of them will not be material to your business. Your company, in conjunction with an independent auditor, should determine an appropriate threshold or benchmark of materiality — usually a percentage of total emissions inventory. In some cases, a category of emissions won’t be meaningful or won’t apply. For example, some companies won’t have exposure to category 14, which are downstream emissions related to franchises.

Key considerations for company leaders

Increase your company’s understanding of supplier data inputs
Work to remove global complexities from the value chain
Seek buy-in from leaders across the enterprise

Increase your company’s understanding of supplier data inputs

How is the data reported? What frameworks are being used?
Does supplier data reporting match the timeframes for your company’s reporting? Do you need to fill in gaps or make any estimations?
Is supplier data complete, accurate and verified?
How granular is the data? Do your suppliers have the capabilities to provide data at the product level? Can they provide inputs such as emissions by truckload, mode of transport, mileage and fuel data?

Work to remove global complexities from the value chain

Efforts to collect data across multiple markets can be stymied by language issues and incompatible reporting software platforms.

Seek buy-in from leaders across the enterprise

Engage the leaders across your enterprise that oversee areas such as logistics, supply chain and finance. Internal data gathering for categories such as employee commuting or business travel may also be required.

How to identify, analyze and calculate Scope 3 emissions

Depending on the company and what it produces, Scope 3 emissions can occur at varying degrees across its value chain. The graphic below illustrates this by depicting how an automobile manufacturer generates a select group of Scope 3 emissions. In this case, use of sold products accounts for most of the automobile manufacturer’s emissions. They are generated when a consumer purchases the vehicle and consumes fuel over the lifetime of the car. In many industries, purchased goods and services will also be a significant category of emissions.

Whether your company produces cars, software or food products, you should concentrate your resources on the categories of Scope 3 emissions that may present the greatest risks and opportunities for the business and the entities responsible for generating the associated emissions. Your company’s Scope 3 emissions inventory should align with the overall organization boundary it defined for Scope 1 and Scope 2 emissions (using either the control or equity share methods).

Ideally, companies should rely on data that can be measured or derived from a primary source such as an invoice or bill of sale. Any data that’s transferred between your company and your suppliers and business partners should be verified for accuracy and completeness. A resource your company can utilize is an environmental product declaration, also referred to as a lifecycle assessment (LCA), which provides thorough, certified information on the lifecycle of a product or material. LCAs will help you assess the environmental impact of the goods your company has purchased and could help you consider alternatives as part of your emissions reduction plan. Companies frequently perform LCAs on their products, so consider asking your suppliers to share those reports.

Companies can also leverage environmental disclosure platforms such as CDP to gain supply chain insights. CDP’s system to measure and manage environmental risks can enable your company to gain insights on your upstream emissions and accelerate supplier engagement.

In some cases, you’ll need to rely on secondary data that’s not generated from a specific activity in the value chain to fill gaps. Sources of secondary data include government statistics, recognized databases, industry or national averages, industry associations or studies. Companies should disclose the use of secondary data, whether or not it’s verified and any assumptions made in the calculations.

The GHG Protocol allows companies some flexibility for calculating Scope 3 emissions. For example, companies can use these three methods to calculate emissions from purchased goods and services:

Supplier-specific method: Collect lifecycle assessment, emissions impact analyses and other product-level data from suppliers. A hybrid of this approach uses secondary data to calculate upstream emissions wherever supplier-specific data is not available.
Average-data method: Estimate emissions for goods and services by collecting data on the mass of relevant goods or services purchased and multiplying by the relevant industry average emission factor.
Spend-based method: Estimate emissions for goods and services by collecting data on the economic value of goods and services purchased and multiplying by the relevant industry average emission factor.

Regardless of the data sources used in calculating your Scope 3 emissions, transparency is the key to giving stakeholders comfort in the information. Companies shouldn’t worry if they don't have complete and accurate data in the first year of calculations. Inventory quality tends to improve as companies iterate each year.

How your company can manage emissions over time

Your company should aggregate these calculations at the corporate level, allowing you to assess where the bulk of your emissions come from and develop goals for reducing or offsetting these emissions. Your company may choose to have a single goal for reducing Scope 1, Scope 2 and Scope 3 emissions, a single target for each or individual reduction goals for every Scope 3 category. If your company has committed to the Science Based Target Initiative’s Net Zero Standard, it will be required to set both near- and long-term targets and meet these goals in certain timeframes. For example, a long-term science-based target must be met by 2050 or sooner and cover 95% of Scope 3 emissions. Whatever the goal, your company should pick a base year for the target and an aspirational completion date so it can measure progress over time.

There are multiple pathways available to companies when they are considering emissions reductions. The selection of the right one for your company will help you make informed decisions about short-, medium- and long-term goals.

Engage your suppliers
Executing on goals requires your company to reevaluate internal processes and engage suppliers on opportunities for improvement. For many companies, a small group of suppliers will account for a large portion of Scope 3 emissions. It’s imperative that your company engage these suppliers and work together on a strategy for creating greener operations that could include:

Shared learnings and resources related to decarbonization efforts
Training and upskilling suppliers in key areas related to decarbonization
Procurement processes that include mandatory carbon reporting and carbon reduction
Recognizing suppliers when they meet an emissions target
Contracts that include clauses around calculating and sharing GHG emissions that could lead to termination when suppliers don’t comply

Tactics for decarbonization

In general, your company can take actions when managing emissions by pulling “decarbonization levers.” For example, you could avoid, shift, offset or improve your emissions in the following categories using these tactics:

Purchased goods and services: Procure products that have higher levels of recycled content. Engage with suppliers to help them set their own emissions targets.
Upstream transportation and distribution: Work with suppliers that are improving their transportation systems to reduce fuel usage and mileage and those that have purchased more fuel-efficient vehicles.
Employee commuting: Establish work-from-home or remote work policies that reduce commuting. Encourage employees to use alternatives (such as biking, carpools and public transit).
Use of sold products: Design products that have a lower use phase impact (e.g., improve product energy efficiency).
End-of-life treatment of sold products: Educate consumers on proper end-of-life disposal and design products for reuse, refurbishment or recycling.

Stakeholders want to hear your story

Reporting is an important opportunity for you to be transparent with your stakeholders about your emissions reduction strategy and the progress you have made towards any goals. There will likely be greater scrutiny of this reporting in the years to come given the SEC’s new climate disclosure rules, Europe’s CSRD and California’s climate reporting requirements.

Granted, companies that are just starting their Scope 3 projects may not yet have a great story to tell. But the market expectation is for progress not perfection, and reporting on how you are measuring and managing emissions is how you prove your company’s commitment to mitigating the risks of climate change.